Target’s $5bn reset faces headwinds as traffic declines, margins narrow

Target Corporation‘s fiscal first quarter of 2025 offered a revealing snapshot of a company caught between structural disruption and strategic reinvention. Even as the retail giant reaffirmed a bold $5 billion capital plan for store upgrades, technology investments, and product line expansions, its Q1 performance underscored just how steep the climb ahead remains.

Net sales declined 2.8% year-over-year to $23.85 billion. Comparable store transactions dropped 5.7%, while digital growth—up 4.7%—wasn’t enough to offset weaknesses in in-store execution and consumer sentiment. In a quarter marked by margin compression, elevated markdowns, and reputational turbulence, Target’s Q1 EPS of $1.30 (adjusted) fell short of expectations, despite a one-time GAAP EPS boost to $2.27 from a $593 million litigation settlement.

Why Did Target Sales Decline in Q1 2025?

Target’s topline deterioration reflects a mix of soft consumer spending, inflation fatigue, and operational friction. Total merchandise sales fell across nearly all categories, including apparel (-4.8%), home furnishings and décor (-8.5%), and household essentials (-4.2%). Food and beverage was the lone gainer at $5.9 billion, edging up 0.8% from a year earlier.

Store-originated comparable sales dropped 5.7%, driven by a 2.4% decline in traffic and a 1.4% drop in average transaction value. Digital channels—accounting for 19.8% of total sales—saw 36% growth in same-day delivery through Target Circle 360™, but that uptick came with labor-intensive costs and fulfillment strain.

The numbers highlight a trend consistent across retail: discretionary categories like apparel and home continue to struggle post-pandemic, while essentials and value-focused formats gain share.

What Are the Root Causes of Target’s In-Store Friction?

Operational pressures within Target stores are increasingly visible. Customer feedback points to poorly stocked shelves, long checkout queues, and limited employee availability. For a brand long differentiated by its in-store aesthetic and guest experience, this signals deeper dysfunction.

Retail strategists say the issue stems from underinvestment in labor relative to footfall and SKU density. While Target maintains nearly 2,000 stores nationwide, staffing ratios haven’t kept pace with demand spikes—particularly during seasonal peaks like Valentine’s Day and Easter, which otherwise saw positive engagement.

Target’s focus on cost discipline has contributed to this mismatch. SG&A expenses fell 10.8% YoY, but when normalized for a $593 million litigation gain, SG&A as a percentage of sales actually rose to 21.7% in Q1, up from 21.0% in the prior year, suggesting continued strain on operational throughput.

How Is Inventory Management Impacting Profitability?

Inventory levels rose to $13.05 billion in Q1, a 2.4% increase from the prior quarter, even as total merchandise sales dropped. This inventory overhang is problematic, particularly as it pressures gross margin—now at 28.2%, down from 28.8% in Q1 2024.

The mismatch reflects an ongoing issue with Target’s replenishment and forecasting systems. Despite recent AI-driven supply chain upgrades, integration gaps with older fulfillment infrastructure have led to oversupply in low-turn categories and persistent out-of-stock issues elsewhere.

This imbalance increases markdown rates, clogs cash flow, and weakens inventory turnover—metrics that are being closely tracked by institutional investors as a proxy for retail execution.

Is Target’s E-Commerce Growth Sustainable?

Target’s digital strength remains one of its few Q1 bright spots. Digital sales grew 4.7%, bolstered by its same-day capabilities, including Drive Up and delivery via Target Circle 360™. However, the underlying cost structure remains fragile.

Roughly 97.6% of digital orders are fulfilled via physical stores. This “store-as-hub” model creates synergies but also introduces vulnerabilities. When stores are understaffed—an issue already plaguing Target—fulfillment delays and service lapses become inevitable.

While Amazon leans on robotic fulfillment and Walmart integrates automated distribution centers, Target continues to depend on manual labor for digital fulfillment. Analysts caution that unless this model evolves toward greater automation, scaling profitably in e-commerce will be difficult.

Why Are Target’s DEI Policies Drawing Pushback?

Target’s diversity, equity, and inclusion (DEI) initiatives—once a pillar of brand identity—have become a source of external pressure. The retailer faced a renewed wave of online boycotts in Q1 2025, particularly surrounding pride merchandise and in-store displays. In response, Target quietly adjusted the location and prominence of certain product lines, attempting to strike a middle ground.

However, this repositioning has satisfied neither vocal opponents nor progressive advocates, leading to brand confusion and trust erosion. In regions with higher concentrations of conservative shoppers, store traffic saw noticeable dips, highlighting the business cost of ideological entanglement.

While Target remains committed to its DEI values, it now faces a reputational balancing act in a hyper-politicized retail environment.

What’s in Target’s $5 Billion Capital Plan?

Target’s announced $5 billion investment plan encompasses more than 300 store remodels, supply chain modernization, technology upgrades, and category expansion—particularly in home, food, and private-label goods.

However, in Q1, actual capital expenditures were $790 million, suggesting a staggered implementation. Management attributed the slower pace to planning cycles and strategic sequencing, but institutional investors are watching for acceleration in H2 as proof of seriousness.

CEO Brian Cornell unveiled the creation of an “Acceleration Office” in May 2025, led by former CFO Michael Fiddelke, to oversee faster decision-making and operational execution. While this organizational reshuffle signals urgency, real results will hinge on execution in the months ahead.

Sentiment Snapshot: What Are Investors Doing?

Target shares (NYSE: TGT) have fallen approximately 12% YTD as of May 30, 2025, underperforming peer retailers and broad consumer staples indices. Analysts at major firms flagged the company’s sluggish inventory turnover and underwhelming traffic metrics as key concerns.

On the institutional side, passive funds continue to hold long positions due to Target’s stable dividend payout—$510 million in Q1—and its relatively low price-to-earnings multiple. However, active managers have become more selective, with some trimming exposure in anticipation of further margin compression.

Notably, Target repurchased $251 million worth of shares in Q1 at an average price of $114.60, signaling internal confidence. The company has $8.4 billion remaining under its authorized buyback program, which could offer downside protection if deployed tactically.

What’s the Outlook for FY2025 and Beyond?

Target now expects full-year GAAP EPS of $8.00 to $10.00, with adjusted EPS forecast between $7.00 and $9.00. This implies margin pressure will persist, even if topline stabilizes. Management also projected a low-single-digit sales decline for the full year—signaling limited optimism for a near-term bounce.

Long-term upside could emerge from better private-label performance, omnichannel service enhancements, and inventory right-sizing. But execution will need to move faster, and more aggressively, to match market expectations.

Analysts warn that if store traffic doesn’t rebound by Q3 and the capital plan fails to visibly lift customer satisfaction scores, Target risks not only market share erosion—but a deeper loss of brand equity in an era of retail hyper-choice.